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Archive for Sunday, August 5, 2001

SRS creditability questioned ––— Back-door payments spur agency into bankruptcy

August 5, 2001

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It's a situation that reaches into the office of the lieutenant governor, who once sat on the board of a Wichita social service agency that got its bills paid earlier this year by the Department of Social and Rehabilitation Services while another SRS contractor was drowning in debt.

Six weeks ago, United Methodist Youthville, the state's largest foster care contractor, filed for Chapter 11 bankruptcy protection. It had run out of money, in part, because it hadn't been paid by other foster care contractors.

Youthville's fate was sealed, court records show, when SRS, acting on an inquiry from Lt. Gov. Gary Sherrer, cut Youthville's May payment by more than $500,000.

"That put us in great difficulty," said Carl Martin, a Methodist clergyman and former president of Southwestern College who has been Youthville's interim president and CEO since June.

Most legislators were surprised to hear of the deal, said Sen. Sandy Praeger, a Lawrence Republican.

"Everybody needs to be held accountable on this," she said.

Rep. Rocky Nichols, a Topeka Democrat, was more adamant.

"SRS and the Graves administration ought to be embarrassed and ashamed," he said.

Settling debts

SRS pulled the funds to settle Youthville's long-standing debt to Salvation Army of Wichita, one of its largest subcontractors. Sherrer is a former president of the Salvation Army governing board.

In an interview, Sherrer said he was unaware the money had been taken from Youthville's monthly payment.

"It was my understanding this was an 'advance' to Youthville that was to be assigned to the Salvation Army. It wasn't meant to be a cut, it was meant to get Youthville caught up," Sherrer said.

But Youthville records show its May payment was $500,000 short. Three weeks later, Youthville filed for bankruptcy protection.

Sherrer confirmed that he had called Joyce Allegrucci, SRS assistant secretary in charge of children and family policy, after receiving a letter from the Salvation Army complaining that Youthville's debt was threatening the Salvation Army's solvency.

"I asked Joyce to look into it, to see if (the letter) was accurate," Sherrer said. "After that point, I was pretty much out of it."

Sherrer said his inquiry was not out of the ordinary.

An 'old story?'

"There isn't a day that goes by that somebody doesn't call or write me, asking us to look into something," he said. "That's all this was."

Allegrucci declined comment on the payment.

"This is an old story that, unfortunately, is damaging to children and families every time it is repeated," she said. "This story and others like it force Kansas children, families, foster families and workers to unnecessarily wonder if the system is going to collapse, when, clearly, it is not."

SRS paid Salvation Army on April 25, the first day of this year's 11-day legislative wrap-up session. Legislators were not told of the unorthodox payment. In the past, SRS has argued against getting involved in billing disputes among its child welfare contractors.

"I did not know they did that," said Rep. Melvin Neufeld, R-Ingalls, chairman of the House subcommittee that oversees the SRS budget.

"I wasn't aware of that," said Steve Morris, R-Hugoton, chairman of the Senate Ways and Means Committee.

"This is very disturbing," said Rep. Brenda Landwehr, R-Wichita, chairwoman of the Legislature's Joint Committee on Children's Issues.

'Serious questions'

Landwehr said news of the Salvation Army payment raises "a lot of serious questions about why one subcontractor got singled out and the others didn't, especially after what we went through with Lutheran Social Services."

Last year, Lutheran Social Services, the state's adoption contractor from 1996 to 2000, announced it may have to file for bankruptcy. The 120-year-old charity later reached an out-of-court agreement with its creditors, paying them 74 cents on the dollar. SRS later awarded its adoption services contract to Kansas Children's Service League, a Topeka agency.

During the 2000 legislative session, SRS officials successfully lobbied against efforts to make the state responsible for Lutheran's unpaid bills, saying the shortfall was a business matter between a contractor and its subcontractors.

This year, SRS opposed a bill introduced by Landwehr and Nichols that would have required the welfare agency's contractors to pay their subcontractors' bills within 30 days. The bill died in committee.

"This is just unbelievable," Nichols said. "SRS comes in, says 'We don't need this, everything is OK,' our bill gets killed, and now we find out that two weeks later they cut a check to the Salvation Army."

Financial disarray

In retrospect, losing $500,000 wasn't the worst of Youthville's troubles.

Records show Youthville's finances hit bottom in July 2000 when it lost the state foster care contract for western Kansas. At the same time, Youthville had depleted its $20 million foundation to pay for foster children costs not covered by state reimbursements.

"All that money -- our reserves -- is gone," Martin said of the period. "It's at this point, we started accumulating enormous amounts of accounts payable and receivable."

Youthville now has the 2000-2004 contract for foster services in Sedgwick County, which accounts for one-fourth of the 3,700 children in the state's foster care system.

Bankruptcy records show that St. Francis Academy, Youthville's successor in western Kansas, owes Youthville $650,000. The state's adoption contractor, Kansas Children's Service League, owes Youthville $510,000.

Both bills represent debts that had been accumulating for 12 months.

After learning Youthville officials had been interviewed by the Journal-World, Kansas Children's Service League promised to pay its bill by Aug. 15.

At St. Francis Academy, Cory Rathbun, vice president in charge of foster care reintegration, declined comment on whether the program is able to pay its Youthville bill.

"We just completed our annual audit, and we're waiting on the results, so I really can't comment on our ability to pay (Youthville) right away," Rathbun said.

Throughout the contract, it's not been unusual for Youthville's debtors to be more than $2 million behind in their bills.

"When we were out of our reserves and with our receivables running as high as $2 million a month, you can see why we're in a crunch," Martin said. Last week, Youthville's debtors were $1.2 million behind in their payments.

Allegrucci refused comment on Kansas Children's Service League and St. Francis Academy's debts.

"(SRS) will not comment on the contractors' day-to-day receivables. That's an issue that's between them and their subcontractors," she said.

Debts, more debts

Bankruptcy records show that SRS advanced Youthville $3.5 million at the onset of the 2000-2004 contract. SRS expected the money to be paid back during the next four years.

So far, Youthville has paid back $60,000.

"They want us to pay $90,000 a month," Martin said. "But we can't do that, we don't have it."

Youthville also owes the State of Kansas $488,551 for services provided to foster children by Larned State Hospital and the state-run Rainbows Mental Health Facility in Kansas City, Kan.

"What happens with what we owe the state will be addressed in the bankruptcy process," said Jane Alleva, vice president in charge of corporate communications at Youthville.

Since filing for bankruptcy protection, Youthville has satisfied most of its creditors. But Martin said he's unsure how long the agency will be able to maintain full or timely payments.

Youthville, he said, needs an additional $2.5 million to protect its cash flow during the remaining three years of the contract for Sedgwick County foster care.

"All our reserves are gone," he said. "We don't have $2.5 million."

The issue is sure to come up Wednesday, when welfare officials will sit down with Gov. Bill Graves to talk about how the state's foster care program is working. Praeger will be among a handful of legislators at the meeting.

"This is ugly," she said. "Credibility is absolutely essential for state government. I'm afraid our credibility may be at risk."

Senate budget committee chairman Morris will be there, too.

"All of us want to do what's right for children -- and I think we are -- but we've got to do something to get the financial end of this under control. It seems like this just keeps getting deeper and deeper."

-- Staff writer Dave Ranney can be reached at 832-7222.

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